Small- and medium-sized enterprises (SMEs), companies that employ fewer than 500 people, felt the brunt of the economic meltdown more so than large companies, with many curtailing growth and hiring, and some going under or filing for bankruptcy.
“Small and medium enterprises, which played a crucial role in job creation and economic growth in the early and mid-2000s, incurred major setbacks during the Great Recession. … For many SMEs still standing after the crisis, the continuing credit squeeze hinders access to the debt financing needed to expand their operations,” according to an early 2011 article by RSM International, an independent consulting firm.
Over the past two years, more than three million employees from European SMEs were retrenched. During the same time period, around 60 percent of the U.S. unemployed had worked for SMEs.
Numbers are hard to come by, as the U.S. Census Bureau doesn’t break out unemployment figures based on size of company.
The construction and real estate sector were hit the worst, with more than 2.2 million construction jobs lost. Numbers are not known, but the service sector—mainly recreation, tourism, and education sectors—accounted for a great number of the unemployed. Even today, these sectors have not attained economic health.
“SMEs typically create and destroy about 3.5 times the amount of gross jobs as large businesses,” suggested a 2011 Special Report from TD Economics, a financial services consulting firm.
Research indicates that SMEs are no longer contracting and retrenching has slowed down, as banks are more willing to lend to smaller-sized companies, as long as their financial state is considered to be healthy. Yet lending is not the only factor that influences economics in the SME sector, but also sales and new orders have a great impact, and they have been sluggish.
“Traditionally SMEs are the first in and the first out of recessions—reflecting their vulnerability to economic downturns, as well as their nimbleness to change quickly and take advantage of a recovery,” according to the TD Economics report.
SME Market No Longer Bullish
The Greenwich Associates Credit Availability Index for medium-sized companies “pushed into positive territory last quarter for the first time since the second half of 2007,” announced Greenwich, a financial services consultancy firm, in a mid-September press release.
Economists and financial experts stymied the good news immediately with the gloomy forecast of another recession, predicting that small- and medium-sized companies would call off expansion plans.
“We now have strong evidence that, as of July 2011, companies were gaining confidence in their ability to obtain bank credit. But as markets enter yet another phase of volatility, it seems very likely that demand will come under renewed pressure,” cautioned Greenwich.
Reducing Regulatory Burden
“The SEC [Securities and Exchange Commission] regularly takes steps to reduce the regulatory burdens on small businesses in raising capital in a manner consistent with investor protection,” said a mid-September SEC press release.
The SEC is forming an advisory committee for small and emerging companies with less than $250 million in market capitalization.
The intent of the committee is twofold. First, the committee will establish a process that helps these smaller-sized firms procure needed capital to grow and secondly, there needs to be a way to protect investors from loss of their investment.
The committee will have 17 members, mostly executives and lawyers drawn from various industries and law firms. The SEC called for comments with no apparent deadline.
Five comments were received by Sept. 26 and posted on the SEC website. The first comment argued that the committee membership did not include any possible investors.
“The investor might feel that some regulations are not in their best interest and hinders their ability to make good investment decisions in these companies,” Scott Schwartz said.
The second comment asked that the committee also look out for the interest of microcap companies, which were not included in the present proposal. Microcap companies are those with market capitalization between $50 million and $300 million.
“Many microcap companies do not file financial reports with the SEC, so it’s hard for investors to get the facts about the company’s management, products, services, and finances. … Fraudsters can easily spread false information,” according to an entry about microcap companies on the SEC website.
The third comment is by a broker who recommends that broker dealers who sell small businesses or are instrumental in raising capital for said businesses be licensed. Apparently, the existing licenses are not appropriate for safeguarding an investor.
The fourth comment discusses a number of rules presently being used by investors that are too difficult to maneuver, including hedge accounting treatment for interest rate swaps, and should be eliminated as much as possible. Also, simplification of proxy rules would help greatly and should become part of the new rules to be developed by the SEC.
Hedge accounting tries to lessen volatility when the value of the financial instrument is repeatedly adjusted to market price.
Proxy voting represents a situation when the right to vote is delegated to another individual or group.
“We are being squeezed between the desire to remain a public company and the increasing costs of being public. We have many areas of concern but there are several rather simple changes that we believe could reduce the complexity of compliance rather easily,” advised Jon A. Faulkner, CFO of the Dixie Group Inc., in his comment.
Lastly, a certified public accountant (CPA) proposes that the SEC provide a financial literacy program for small corporations, as most small companies are sorely lacking in such skills, which can be seen when evaluating financial statements prepared by small companies.
“Too many decisions are based on ‘gut’ not the financial results of operations and unfortunately, the Balance Sheet serves few,” said Patricia A. Thornton, CPA.
Next...Commercial Property Market Trending Up
Commercial Property Market Trending Up
An important sign of economic recovery for SMEs is the commercial property market, which is trending up.
“Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market,” suggested a FRBSF Economic Letter, published by the Federal Reserve Bank of San Francisco (Feds) in September.
The Feds analyzed a number of different indexes, including the Moody’s/REAL commercial property price index, which differ quite a bit from each other. One is suggesting that prices have increased by 19 percent, while others herald falling prices. Given that more indexes are falling than rising, the Feds suggest that the market is in a rebound phase.
To predict if markets are rising or falling, analysts compute the ratio of net operating income to the price of the respective property. The Fitch Rating Agency sees an improvement in the above ratio, although it hasn’t yet reached the 2009 level.
The Costar Commercial Repeat Sale Index increased by 1 percent in July, the most recent numbers available.
“Transaction activity decreased slightly in July, with a total of 766 sale pairs compared with the monthly average of 834 in the last six months. … At the low point in the most recent downturn, only a total of 375 transactions were recorded in January 2009,” according to Costar Group Inc., a commercial real estate consulting firm based in Washington, D.C.
Government Getting Into the Act
“Everyone here knows that small businesses are where most new jobs begin. And you know that while corporate profits have come roaring back, smaller companies haven’t,” said President Barack Obama in his September address to Congress.
The American Jobs Act, rolled out during the president’s speech, includes a section specifically addressing SME needs. It calls for cutting payroll taxes by 3.1 percent for small businesses for up to $5 million in salaries, eliminating payroll taxes for SMEs that hire the unemployed.
The U.S. Small Business Administration, created by the Small Business Act of July 30, 1953, provides access to SME capital needs, advisory services, federal contracts education, and other tools necessary for SMEs to survive.
“The mission of the Small Business Administration (SBA) is to maintain and strengthen the Nation’s economy by enabling the establishment and vitality of small businesses and by assisting in the economic recovery of communities after disasters,” said the SBA in its 2011–2016 Strategic Plan.
